'Semi-arranged match' may not fill all gaps for Bandhan Bank

Deepak Parekh, Chairman of HDFC, termed the merger between Bandhan Bank and Gruh Finance as a semi-arranged match. But this one too, as with any marriage, may take time to establish compatibility. Tuesday’s stock market reaction echoes similar sentiments. While Gruh Finance stock took a big beating – down 17 per cent to adjust to the merger swap ratio — Bandhan’s stock fell over 5 per cent.

While the merger with Gruh Finance expands Bandhan’s footprint beyond its core eastern and north-eastern markets, there are still concerns over the value accretion the deal can offer to investors.

Gruh’s loan book at Rs 16,500 crore is sizeably lower than that of Bandhan. However, it does make the latter’s asset portfolio less concentrated around micro-finance loans (MFI loans), with the share of MFI loans reducing to 58 per cent from the current 85 per cent.

On the flip side, the merger also makes Bandhan susceptible to shocks in the housing market. “Affordable housing finance has been witnessing many new entrants, thus impacting the competitive dynamics. If the scaling-up of this business continues to remain profitable, it can provide benefits over the longer term,” noted analysts at PhillipCapital.

Further, with Gruh’s cost of funds at 7.6 per cent, it is about a per cent higher than that of Bandhan. Gruh’s liability portfolio is also dependent on banks and other market borrowing for 89 per cent of its funding needs. More importantly, despite being a deposit-accepting entity, deposits account for only 9 per cent of its liability profile. For Bandhan Bank, scaling up deposits is the need of the hour. With a current account–savings account (CASA) ratio of 37 per cent, the metric needs to strengthen further.

Finally, with 7 per cent dilution to earnings and 12 per cent dilution to the merged entity’s book value, it needs to be seen whether Bandhan Bank will sustain its premium in the next round of equity dilution to further reduce promoter holding to 40 per cent, say analysts.

“Finding a good quality candidate for inorganic growth to further reduce stake could be challenging. Likewise, for Bandhan Bank’s investors, at what stage their promoters dilute their holding remains a big overhang,” says Siddhart Purohit of SMC Capital. This is the reason questions have been raised as to why investors have been subject to a couple of rounds of stake reduction.

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